(Bloomberg) -- The stock market’s fixation on quarterly earnings and short-term performance makes it a suboptimal funding venue for companies critical to the energy transition.
That’s according to Emmanuel Lagarrigue, a partner and co-head of climate at KKR & Co., who says such companies would do better with more patient investors.
“Public markets are probably the cheapest cost of capital,” Lagarrigue, who was a senior executive at Schneider Electric SE before joining KKR in 2022, said in an interview. “But at the same time, they have volatility and very short memories, so it’s very difficult to have a long-term, thoughtful strategy for very large and consequential corporate transformations.”
Money managers overseeing private equity and debt portfolios are now emerging as a powerful force in climate finance. It’s a timely development, as capital-intensive green tech companies struggle to attract sufficient investment and high-carbon large caps face diminished interest from shareholders for ambitious decarbonization plans.
An energy crisis, as well as higher inflation and interest rates, have complicated the energy transition. And add to that a protracted stock market selloff: Since the beginning of last year, the S&P Global Clean Energy Index is down 28%, compared with the 45% increase in the S&P 500 Index.
In private markets, however, it’s a very different picture. Between 2016 and 2023, private fund allocations to renewables have consistently outperformed those in oil and gas, according to a recent MSCI Inc. analysis.
“There’s that transition moment for companies that public markets are not equipped or designed to undertake,” Lagarrigue said.
There’s a mismatched time horizon between the demands of public market investors and the requisite period for decarbonization. And some corporate leaders are now coming to the conclusion that shareholders focused on short-term returns “are not going to support them anymore,” said Lagarrigue.
“It’s very difficult for the CEO of a company to go to their shareholders and say I’m going to invest 3 billion in a new asset that’s going to radically change our carbon footprint and create new growth, but the cash flows are coming in five or seven years,” said Lagarrigue. “That doesn’t work.”
There’s evidence to suggest that other private money managers are seeing an opportunity to step in. An analysis provided by Preqin found that of the $156 billion raised by private credit funds last year, about 16% went into products claiming to target environmental or social goals. That’s a bigger share than for any year since at least 2014, with data for this year through June indicating the trend is set to continue, according to Preqin.
While private investors typically shield company bosses from the shorter time horizons of public markets, they’ve also been called out for their relative lack of transparency. BlackRock Inc. Chief Executive Officer Larry Fink warned in 2021 of the need to shine more light on private markets and their role in climate finance, or risk “the largest capital-market arbitrage in our lifetimes.” Back then, the concern was more that private markets were quietly absorbing the high-carbon assets being sold by public markets.
More recently, however, BlackRock has taken significant steps to increase its footprint in private markets. The world’s largest money manager just announced it’s acquiring Preqin, one of the most frequently tapped providers of private-market data. That’s as private markets emerge as the fastest-growing corner of money management, with alternative assets expected to reach almost $40 trillion by the end of the decade, according to BlackRock.
Other industry leaders, including Blackstone Inc. and TPG Inc., have identified the energy transition as a key investment opportunity. Last year, Blackstone raised $7.1 billion for a fund to finance solar companies, electric car-part makers and technology to cut carbon emissions.
Lagarrigue is the co-head of KKR’s debut climate fund, which, though still fundraising, has made a handful of initial investments, including in UK power storage company Zenobe Energy Ltd.
Part of the fund’s mission is to address a gaping hole in climate funding: the so-called “missing middle,” or the chasm between venture capital and infrastructure funds where many companies developing critical green technologies fall. Such companies typically have proven business models and some existing cash flow, but require significant capital injections in order to grow.
“Early-stage capital and growth equity is all pretty well covered, so we have nothing to add to that conversation,” Lagarrigue said. “And classical renewables — wind and solar — are also well covered by infrastructure.” So with the new climate fund, which has an expected average investment period of five to seven years, “we’ve taken the option to address the missing middle,” said Lagarrigue.
With some of the core components of the low-carbon transition, such as batteries and green steel, “you can argue that the technology risk is behind them,” he said. Those are the investments KKR is looking for.
Other more experimental areas such as direct air capture, small modular reactors or alternative proteins “still need to be de-risked, validated and consolidated,” he said. These technologies “will come to maturity at some point in the next few years,” at which point KKR could be interested in investing, Lagarrigue said.
Listen on Zero: What Bottlenecks? A Major Asset Manager Is All-In on Renewables
(Adds industry context in 13th paragraph about other investment firms.)
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